Non performing assets (NPA) of Indian banks may rise to 3.25-3.75% of total advances as compared to 2.17% in March 2009. This data has been forecasted by the credit rating agency ICRA. The forecast is based on the quarterly analysis done by the agency of 43 major commercial banks of the country. The 43 banks comprise of all the public sector banks and large private sector lenders-thus amounting to 90% of the banking market in the country.

NPAs are an indicative of the performance of banks. Rise in NPA is an indicative of large loan defaults which in turn affect the profitability and net worth of the bank. Rising NPAs are a big threat to the banking sector.

Supporting its forecast, ICRA has said that there have been flaws observed by public sector banks in their reconstructed loan portfolio. According to data shared by the largest bank of the country, State Bank of India in its third quarter result there has seen a slippage of Rs 2,621 crore in the nine months between April and December 2009.

In addition, ICRA feels another reason which would attribute to increase in NPAs in the banks is the slack agricultural portfolio that has not yet been classified as NPA by banks. The banks are still expecting some relaxation from RBI or government in this regard.

The SBI has not made this provision on expectation that government may extend the one-time settlement scheme for farmers which expired on December 2009.

NPAs for the 43 banks kept under monitor rose to 2.40% from 2.17% in the first nine months in March. The rating agency feels that more derelictions from the restructured portfolio (twice the level of gross NPA in the system) together with the proposed change in the provisioning norms could impact banks' earning and asset quality. As on June 2009, 4.6% of total advances of public sector banks and 0.81% of private sector banks were restructured.

Moreover, ICRA says that in order to maintain a capital adequacy ratio(CAR) of 12% public sector banks would be needing a capital of Rs.1,00,000 crore. However, the agency feels that private banks would be able to maintain their CARs well over 12 % provided the increment in reserves and capital as in the past.

This week, SBI chairman OP Bhatt had cited the bank's need of capital in access of Rs 40,000 crore in the next five years. Most PSU banks have approached the government for capital under the World Bank scheme which proposes to give $ 2 billion long-term loan to state-owned banks.

The agency also expects interest rates to rise in the upcoming few months and this would impact the profits before tax by 10-20%. Improvement in interest margins is also expected as banks replace most of high cost deposits in their credit books with low cost funds.